Euro Spikes After ECB Drops Promise To Increase Bond Buying

Seen as a small step towards normalisation from the ECB's governing council after stimulus measures were implemented during the eurozone crisis, the Bank removed a paragraph featured in previous monetary policy meeting minutes, which said it stood "ready to increase the asset purchase programme in terms of size and/or duration" should concerns in the bond market rise.

ECB President Mario Draghi said the reason for the statement removal "was a backward looking decision without signals or implications for either our expectations or reaction function".

However, the ECB reiterated it will continue its €30bn-a-month quantitative easing (QE) programme to the end of September this year, or beyond if necessary, while maintaining rates at 0%, unless there is a considerable change in inflation.

Today, the central bank said: "The governing council confirms the net asset purchases, at the current monthly pace of €30bn, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the governing council sees a sustained adjustment in the path of inflation consistent with its inflation aim."

On the news, the euro bounced back from earlier losses spiking 0.35% to $1.242 against the US dollar, and 0.28% to £0.895 against the pound.

Managers warn unwinding European QE could burst 'the mother of all bubbles'

The removal of the statement follows the ECB's decision to half its €2.5trn bond-buying programme from €60bn-a-month to €30-a-month in January, as announced last year.

It is expected its asset purchase programme will complete by September. However, with the Italian election result increasing political risk in the region once again, the ECB has kept the option open to go beyond the set end date.

Draghi said it was "rising protectionism" and developments in foreign exchange in other financial markets which were the biggest downside risks to the eurozone.

Following comments from US Treasury Secretary Steven Mnuchin that a weak dollar was good for the US, the president had previously hit back by claiming his remarks breached a pledge by International Monetary Fund (IMF) members.

Draghi expressed concern about the unilateral decisions US President Donald Trump was making regarding the trade tariffs.

Trump is expected to sign a proclamation this week which will implement tariffs on steel and aluminium.

"Whatever convictions one has about trade, we are convinced disputes should be discussed and resolved in a multi-lateral framework. Unilateral decisions are dangerous," he said.

"There is a certain worry about the state of international relations because if you put tariffs against your allies one worries who the enemies are."

Market reaction

Jake Robbins, manager of the Premier Global Alpha Growth fund

"The ECB has slightly unexpectedly removed the option, if necessary, of increasing the size and duration of QE from their press release.

"While not a major change in language it could be taken as a further sign of the commitment of central banks globally to steadily reduce the loose monetary conditions that have prevailed for a decade now.

"While the global economy continues to accelerate, a faster pace of interest rate hikes and withdrawal of QE has the potential to stoke further bouts of volatility like those seen earlier this year.

"However, given the risks around global trade as a result of US imposed tariffs and some extra political risk in Italy, it is unlikely that the ECB will move any faster than markets expect anytime soon, particularly given inflation remains subdued well below their targets."

Richard Carter, head of fixed interest research at Quilter Cheviot

"The ECB today took a small step towards the QE exit door by adjusting their forward guidance.

"They dropped their pledge to expand monthly asset purchases if required, suggesting that they are increasingly confident about the economic outlook and the scope for inflation to return to target.

"The ECB's QE program has had a massive impact since it was begun in 2015, pushing bond yields down to historically low levels and supporting inflows into equity markets.

"Going forward, we expect Mario Draghi and the ECB to tread carefully as they look to wind down their stimulus program - the eurozone economy is certainly performing well but the inconclusive Italian election results and the brewing threat of a trade war suggest that major risks remain to the outlook."

Karen Ward, chief market strategist for the UK and Europe at J.P. Morgan Asset Management

"The market did not expect a major shift of tone at this meeting but it has been considering whether the European economic recovery could lead to the ECB ending its QE programme and taking steps towards tighter policy over the course of the year.

"The meeting and press conference were perceived as slightly dovish by the markets.

"In our view, there are cyclical and structural forces that will continue to bear down on inflation in the eurozone, including a sizeable amount of slack in the labour market.

"As a result we believe the ECB will not be shifting away from very accommodative policies until the second half of 2019.

"Low interest rates, coupled with an ongoing improvement in the health of the European banking system, will continue to provide a tailwind for the economy and in turn European corporate earnings."

Timothy Graf, head of macro strategy for EMEA at State Street Global Markets

"A very consensus result from today's ECB meeting. Above-trend eurozone growth and continuing improvements in the domestic labour market brought the end to its easing bias.

"However, any shifts in language to ending its asset purchase programme will have to wait, thanks to the currently benign inflation conditions throughout the eurozone and the recent strength of the euro.

"Our own online inflation measure, PriceStats shows inflation well away from target and actually slowing in recent weeks; suggesting the ECB need not hurry down the road of policy normalisation."

Olivier Marciot, investment manager at Unigestion

"Despite the ECB leaving interest rates unchanged, the rhetoric and details of today's announcement clearly signal the end of monetary policy easing across Europe and paves the way for an era of global normalisation.

"After the initial reaction of the euro strengthening and European yields surging due to the somewhat hawkish headline decision to keep rates as they are, the market is now digesting the more balanced tone of Draghi's press conference.

"The age of accommodative monetary policies will soon be behind us and so too will be the ultra-low volatility world we have lived in over the last few years.

"The pace at which the major central banks normalise their policies will be key to asset returns this year and beyond.

"We believe now more than ever in the power of extended diversification and dynamic risk management."

Stefan Isaacs, deputy head of retail fixed interest team at M&G

"While acknowledging that rising protectionism and euro strength could both prove a source of risk in the future, the ECB raised its growth forecast for 2018 to 2.4%.

"Importantly the governing council also dropped their commitment to increasing the size and duration of the asset purchase programme if required.

"From here the ECB is likely to inch its way towards a tightening of monetary policy. The next steps will likely be an announcement around a further reduction of their asset purchase programme before eventually ending these purchases later this year. Interest rate hikes may follow in 2019.

"In our opinion this approach is consistent with above trend economic growth, a continued reduction in the output gap and gradual upward pressure on inflation towards target.

"The result may further pressure government bond yields especially at the front end, is likely to benefit cyclical industries, and should continue to prove supportive of risk assets."

Laurent Clavel, head of macroeconomic research at AXA Investment Managers

"Assuming the macro unfolds as we expect and corporates keep reporting through business surveys, we expect the ECB to announce the end of its QE programme at the June meeting, extending the QE for only a few months if at all, and switching the focus from QE to key interest rates, emphasising stability "well past the horizon" of QE."

Jordan Hiscott, chief trader at ayondo markets

"Unfortunately, the situation remains the same for the ECB, as despite the strong economic growth, easing policy remains remarkably accommodative, yet inflation remains well below the target of 2%.

"Overcoming this, in light of a potential trade war with the US, will be problematic."